In the last few months, we at insureon have been fielding lots of questions from the small-business owners we talk to about triple net leases: what they are, how they work, and whether they’re a good idea for a small business looking to rent commercial space. Here’s an overview of how triple net leases (and double and single net leases) work, and what you need to consider before entering into one.
Definition of a Triple Net Lease
The good news is that the concept of a triple net lease is pretty straightforward: in this type of commercial real estate agreement, the tenant / renter (aka you, the person leasing space) is responsible for covering three types of expenses in addition to rent:
- Building maintenance.
If you’re thinking, “Yowza! That sounds expensive,” consider that, to accommodate these additional expenses, most triple net leases come with lower base rent than standard (aka “gross”) leases. In residential real estate, triple net leases are far from the norm, but in commercial contexts, they’re much more common, particularly in multi-unit structures (e.g., a strip mall).
Other variations on a net lease include the double net lease, which requires tenants to pay for taxes and insurance, and the single net lease, which requires only that tenants pay property taxes in addition to rent.
Net Leases Vs. Gross Leases
The most useful point of comparison for a triple net lease is a gross lease, which is the type most small-business owners are familiar with from residential renting situations. In a gross lease, the tenant pays a monthly fee to inhabit the space in question, and the landlord takes care of property taxes, building insurance (though a renter may be required to carry Renter’s or Property Insurance), and maintenance costs.
Because those costs can be significant, depending on the age and condition of the building, gross lease rent prices tend to be higher than net lease rents. With the additional monthly expenses comes the peace of mind of knowing that your landlord will fix anything that breaks and handle matters of taxation and insurance.
Who Should Consider a Triple Net Lease?
While a triple net lease may not be ideal for every small-business owner, this type of rental agreement is fairly common in commercial real estate. The “best deals” on triple net leases (and other types of net leases) tend to be for newer properties: in newer buildings, repair and maintenance costs tend to be low, meaning that renters won’t likely need to fork over lots of money to fix or replace malfunctioning items.
In some cases, a rapidly growing business might be able to save money by taking on a triple net lease in a newer building for the short term, especially if it expects to outgrow the space after a year or so. At that point, the business owner can consider other options, likely without having lost much money on rental costs.
How Do I Insure an Office with a Triple Net Lease?
Often, a triple net lease agreement will come with specific insurance requirements. You will likely be required to carry General Liability Insurance and Property Insurance at a minimum (and, if you’re a small business with a low risk profile, you may be able to secure both types of coverage bundled into a Business Owner’s Policy for a discount).
The good news? Most commercial insurance agents who have worked with small businesses are familiar with how triple net leases work and can help you determine a level of coverage appropriate for your business and your building, as well as find a policy that works for your budget.